Plans for either Sydney or Melbourne to become a regional financial services centre to challenge the likes of Hong Kong and Singapore may have to be put on hold, as local fund managers have said that the Australian Securities and Investment Commission’s decision to ban all short selling for thirty days from September 21 will discourage foreign investors.
The move by ASIC has made Australia “the most regulated market in the world”, according to Tom Elliot, managing director at hedge fund MM&E Capital. The chair of the Alternative Investment Management Association, Kim Ivey, said even the temporary shorting ban would fundamentally undermine the Australian financial system. “We’re concerned that, without any short selling , price discovery for many ASX stocks is actually in disequilibrium and as a consequence, many stocks will exhibit increased volatility,” he said.
“We can expect severe outcomes from this short selling ban – investors who want to adopt capital protection strategies either through short selling or through derivative instruments such as CFDs are unable to do so. ‘ Even after ASIC tweaked the ban to allow such things as companies underwriting dividend reinvestment plans, Ivey was critical of the added convolution but grateful the extra exemptions were only temporary.
In particular, he said AIMA Australia was in discussions with ASIC about the allowances that it had given to investment banks which allows them to short sell for market making activities. “Having locked out everyone else to short sellling, our concern is how ASIC will monitor and ensure that investment banks are only undertaking short selling for market making purposes and not being executed in their significant proprietary trading activities,” Ivey said.
ASIC’s snap decision to blanket-ban shorting came after the US, UK and European regulators banned short selling on mainly financial stocks. On the same day as ASIC made its announcement, Taiwan said it would ban short selling on 150 of its largest companies, while the Dutch banned naked short selling for three months. For its part, the Australian Institute of Superannuation Trustees said it had never supported naked short selling, and that super funds “are not active in this area…AIST has long called for better disclosure in short-selling and we hope this will be one of the positive outcomes of the current ban.” ASIC’s argument for the ban was that the Australian market was too small to risk exposing itself to the attentions of global hedge fund mangers, now prevented from shorting in other markets.